Economic Factors that Influence Aggregated Demand and Supply
Amanda Brickey
ECO/372
February 06, 2014
Ed Mendicino

Economic Factors that Influence Aggregated Demand and Supply
Having a solid economy is not a simple task, however possessing the ability to modify and create new ways will make for a prosperous economy. Many factors affect the economy in substantial ways. Within this evaluation of the U.S., these factors will be explained, give an overview of the current state of them, and an analysis of how they affect aggregated demand and supply. These factors include unemployment rate, expectations, and interest rates. Additionally, a set of recommendations for government spending and taxes will be offered based off the economic factors current states.
As of December 2013, according to bureau of labor and statistics, unemployment average is 6.7%. Across the U.S. however some states rate has increased while others had decreased. Currently 39 states had decreases, two states had increases, and nine states had not change from November 2013 to December 2013. For most states, the ongoing lower rate is not a shock as it has continued to decline since 2009 when President Obama took office and signed in the Recovery Act and the Reinvestment Act. Since then the economy has gradually came out of the recession of 2008. Over 7.2 million jobs have been created in the past 40 months by businesses and the auto industry and American manufactures added over 500,000 jobs since January 2010. With the help from government bailouts, the Recovery Act, tax breaks for the middle class and over 93 billion in loans for 166,000 small businesses unemployment has finally started to decrease as Americans climb out of the recession of 2008. Unfortunately, since December 28, 2013 over 1.3 Americans have lost their benefits and have been put on hold for emergency unemployment benefits due to congress not being able to come to an agreement. This number continues to raise also hurting businesses all around due to loss of sales.
According to Vlastelica (2014), “The final reading on the Thomson Reuters/University of Michigan's overall index of consumer sentiment slipped to 81.2 in January, down from the 82.5 posted in December but up from the preliminary January reading of 80.4.” Although analysts were hoping for a reading of at least 81.0, this recent study shows a decrease since the beginning of 2014. Household income seemed to be a major factor for confidence level as upper incomes improved and incomes 75,000 and less decreased.
As for the economy as a whole, prospects for all types of consumers, and personal finances, improvement has remained more resistant specifically longer-term aspects. Economic circumstances reading in December was 98.6, which was up compared to the reading in January of 96.8. Consumer expectations estimated mean is 71.5. Unfortunately, in January the reading was 71.2 also down from December’s reading of 72.1. Expectations of the consumers for the economy perform a major part when dealing with consumption expenditures. Consumers will not spend additional funds nor apply for any kind of loans if the economy is rocky and uncertain. This creates a problem for the government, as one of their prime roles is to keep a stability economy.
United States ranks number three for largest populations having 309,975,000 citizens. There are two reasons why the U.S. is the largest GDP producer as of 2010. They are the market value on all final goods and services, and consumer income. Many different classes are used to separate consumers by their income.
First is the upper class, which is between 1% to 5% of the population. This class makes approximately 150,000, 5%, and over 200,000, 1%, per year, and is split into two categories: old and new money. Next is the middle class, which is the largest percentage of the American population. Within the middle class is the top of the middle class. Citizens of this class are well educated, hold high paying white-collar positions, have post-secondary degrees, are male-dominated and earn at least 100,000 annually.
The second part of the middle class is called the lower class, and is divided into two categories. First, is the satisfied middle class, and despite the humble income, have positivity and fulfillment in their lives. This class is made up of mostly old and young adults with minimal middle aged. Next is the struggling middle class, which contains is made up of households that earn "a lower median family income than Americans who put themselves on the lowest rungs of the social ladder, and have a disproportionate amount of women and minorities, enabling them to have a lot in common with the lower class. The bottom of the middle class is the working class; also known as the blue-collar group.”Alhanati (2012).
Finally is the poverty level at the bottom of all the classes. These classes do not earn enough for the necessities of life such as shelter, food, and clothing. Alhanati, (2012), “The Census Bureau estimates that about 15% of the U.S. population (approximately 42 million people) live below the poverty line, and fall into this class today. The current poverty level is estimated to be any household of a family of four earning between $18,000 and $23,050 per year.
According to Bankrate, Inc. (2014), changes in interest rates can have both positive and negative effects on the U.S. markets. When the Federal Reserve Board (the Fed) changes the rate at which banks borrow money, this has a ripple effect across the entire economy.” Many banks are allowed to set their own rate, however most follow the prime rate when setting credit card rates and home equity lines of credit. Currently the Fed funds rate, discount rate, is .25. This controls the available funds, which in turn controls the inflation and interest rate. If this rate is raised, it makes it more expensive to borrow which lowers the supply of available money, and increases the short-term interest rates. If the rate is lowered, short-term interest rates are decreased.
Federal Reserve Bank offers three different programs for depository institutions: primary, secondary, and seasonal credits. Each program has a different interest rate and is fully secured. Currently, the primary interest rate is .75, secondary is 1.25, and seasonal is .10. Because of the recession of 2007-2008, interest rates have been lowered to help households by saving money and businesses finance new spending. Unfortunately, since the interest rates have lowered, so has the U.S. dollar in depreciation.
The state of unemployment, interest rates, expectations, and consumer income all affect the economy in regards to supply and demand. When unemployment is high, there are less people who are working and less money that can be spent to maintain supply. High unemployment leads to a reduction of demand, which can further perpetuate the problem by layoffs. Without demand, suppliers loose revenue and must make up for the costs by layoffs thereby creating higher unemployment.
Interest rates can affect the demand of borrowing and investing on a consumer and a business level. When interest rates are high businesses and consumers are less likely to borrow but more likely to invest. When interest rates lower, the demand for borrowing increases while the demand for investing decreases. Consumer expectations and income are also factors that can swing supply and demand. A higher disposable income and high expectations result in more spending and investing which create more demand. When disposable income and consumer expectations are low, less money is being spent and therefore demand is lower.
The four factors of interest rates, expectations, unemployment, and consumer income all tie in together. These facets make up our economy and have a “trickle down” effect on one another. When unemployment is low, consumer have higher amounts of income and more expectation, therefore spending and borrowing are both up. When unemployment raises consumers tighten up their spending and borrowing and consumer expectation falls. To spur a slump economy it would be wise to cut government spending in areas that will not foster growth and instead focus on spending money in areas that promote job growth and raise consumer expectations. Tax breaks should be given to families and businesses to help them keep more of their money so that they can reinvest into more goods and services. This will inevitably increase demand, which in turn will increase supply, which ultimately will lead to more jobs.

References
Alhanati, J. (2012). Which Income Class Are You?. Retrieved from http://www.investopedia.com/financial-edge/0912/which-income-class-are-you.aspx Bankrate, Inc. (2014). Prime rate, federal funds rate, COFI. Retrieved from http://www.bankrate.com/rates/interest-rates/prime-rate.aspx Bureau of Labor Statistics. (2014). Economic News Release. Retrieved from http://www.bls.gov/bls/newsrels.htm Central Intelligence Agency. (2014). The World Factbook. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html Federal Reserve Discount Window. (2014). Press Releases & Announcements . Retrieved from http://www.frbdiscountwindow.org/index.cfm The White House President Barack Obama. (2014). Jobs. Retrieved from http://www.whitehouse.gov/economy/jobs
Vlastelica, R. (2014). U.S. consumer sentiment dips in January. Retrieved from http://www.reuters.com/article/2014/01/31/usa-economy-sentiment-idUSL2N0L50TP20140131 worldatlas. (2014). countries of the world. Retrieved from http://www.worldatlas.com/aatlas/populations/ctypopls.htm#.UvLCG2JdWSp`